How Does a Reverse Mortgage Work? Is It Worth The Risk?

How Does a Reverse Mortgage Work? Is It Worth The Risk?

Posted on 22 December 2012.

If you are 62 or older and feel that you may qualify for a reverse mortgage you may be wondering to yourself, “How does a reverse mortgage work?” There has been a lot of talk about reverse mortgages lately and you may be thinking that this type of mortgage would be a good idea for your own situation. Here is some data about reverse mortgages for you to look at so that you can make a more informed decision as to whether you’d like to go forward with the idea or whether it’s something that simply won’t work for you.
Do you qualify?
This is the first thing to get out of the way when you’re wondering “How does a reverse mortgage work?” There are certain qualifications that must be met and if you don’t meet them then there’s no use in going forward with your application anyway.
Here are the requirements for getting approval on a reverse mortgage.
1. You must be a minimum of 62 years old.
2. You must meet minimum credit qualifications.
3. Any current liens on the property must be fully paid off at the closing.
4. The house must be totally paid off or have a low balance owing.
5. If any names are listed on the deed they must also sign the application.
Who issues a reverse mortgage?
Reverse mortgages are issued by the Federal Housing Administration.
How does a reverse mortgage work?
This mortgage is designed to give you access to the equity in your home without having the responsibility of making monthly repayments. You will still be responsible for paying your homeowner’s insurance and property taxes due and you must keep the property in fairly good condition. If you have payment that you regularly make to a Homeowner’s Association, these must be kept up as well. You will also be expected to stay in the property for as long as the mortgage agreement remains in effect.
How payments are made
You have choice when it comes to your reverse mortgage payments. You may choose to get the entire payment as a lump sum, take out a line of credit, receive a monthly income or use a combination of these choices.
The interest rates
Just as you’d expect with a conventional mortgage, there are different interest rates and terms available for reverse mortgages. There are adjustable rates annually or monthly and fixed rates available. The rates will be determined by the HUD rates at the time and these rates remain constant for all lenders.
There are different programs available for reverse mortgages. There are private products available as well as the Government HECM program. Interest rates may vary from one program to the next.
Counseling certificate
If you’re planning on getting a reverse mortgage you will first have to attend a counseling session held by a specialist. This counseling is program-specific and is based on who your lender is. This counseling can be done in person or over the phone. Once you have the certificate you will hand it over to your lender so that he can continue to process the loan.
This counseling has been put in place to make sure that you understand all the ramifications of taking out a reverse mortgage. You will have the chance to ask questions and then you’ll need to make sure that you follow up with any unanswered questions that you may have later. Taking out a reverse mortgage is a big step and you’ll want to be 100% sure that you are making the right decision.
Looking at your choices
Basically, when you take out a reverse mortgage, it can make your retirement a lot simpler. You won’t have to worry about making any more mortgage payments and can instead relax and enjoy the money that is coming your way every month. This does not mean, however, that it is always a wise decision to make.
The one thing that you need to keep in mind is the inheritance money that you want to pass on to your children. If you have no children this may not be a concern for you. If passing down a good inheritance is important to you, a reverse mortgage can certainly affect it. If you take out this type of mortgage and something were to happen to you in the near future, the debt that you have incurred will be passed on to your heirs. If something should happen health-wise that would force you to leave your home, you’ll still have this large debt to pay since one of the conditions of the reverse mortgage is to remain in your home.
Now that you understand more about reverse mortgages and have had your question,” How does a reverse mortgage work?” answered in general, it’s up to you to decide whether it is wise to go forward or not. In some situations reverse mortgages are the perfect solution for retirement and in other cases they can end up being disastrous. You’ll have to look at your own personal situation and see how a reverse mortgage would work for you.